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Investing in Japanese Recovery

The world is still not over the shock of the terrible earthquake and tsunami that hit Japan recently. However, active investors and traders are already looking at investing in Japanese recovery. Investing in Japanese recovery can take several forms. It could be Forex trading the Yen, which has risen in value as Japanese companies and investors repatriate offshore assets. Investing in Japanese recovery can be done by doing Candlestick analysis on stocks that have seen their stock prices fall dramatically. Many of these companies have no production facilities in the Northeastern area of Japan directly affected by the natural disaster. One might well expect to see those stocks recover to their normal values. The trader who correctly reads market trends and market reversal with a close eye on Candlestick patterns may well profit by investing in Japanese recovery. Long term investing in traditionally strong companies like Toyota and Sony could be profitable if the trader is selling short during a market panic and buying stock at the turnaround. As usual the trader will look for signals such as the Doji Candlestick, which signals market indecision, to light the way.

Investing in Japanese recovery requires that the trader do both fundamental and technical analysis. Regarding fundamental analysis, news reports indicate that the Northeast coast of Japan is not the location of much industry. Thus few stocks will be directly affected by damage to company facilities. However, the damage to nuclear power plants and possibility of radiation leaks, meltdown, and loss of a substantial amount of power in the Japanese power grid could affect many companies distant from the actual earthquake and tsunami damage. In analyzing the fundamentals while investing in Japanese recovery the devil, as usual, is in the details. The problem for the investor who only relies on fundamentals to guide his buying stock, selling stock, trading options, and trading futures is that the fundamentals are rapidly absorbed and discounted by the market. Also, many stock price moves are related to the fundamentals but are more strongly driven by changes in market sentiment. Here is where the time honored use of Candlestick chart formations comes into play.

Technical analysis with Candlestick pattern formations can help those investing in Japanese recovery by alerting the trader to changes in market sentiment. When the earthquake hit, followed by the tsunami it took untold thousands of lives. The ensuing market panic spread across the globe. Many anticipated an even worse scenario than what is currency known to be the case. In such moments of trading psychology fear is a major factor. Having a sense of whether fear is still driving such a market or if a market is ready to turn around as traders collect their wits can be extremely profitable. We mentioned the Dojo Candlestick previously. The Doji is a candlestick that is squashed flat. That is to say the opening and closing stock prices are virtually equal. The shadows may extend far above and below the body of the candle. If that is the case the market is very indecisive. When this Candlestick occurs on Candlestick charts that have been trending up or down it signals the strong likelihood of a reversal in stock price. In the case of falling Japanese stocks after the natural disaster it can be a sign that traders are collecting themselves and thinking critically about the ability of the Japanese economy and the Japanese people to pick themselves up and rebuild. However, the trader does not need to interpret. He only needs to trade according to his Candlestick charts and Candlestick trading tactics in order to improve his chances of making profits from investing in Japanese recovery.

Market Direction: What stocks or sectors are going to benefit from the Japanese recovery?  That may be a question that most of us may not have the analytical ability to answer successfully. However, with candlestick analysis, you do not have to be able to dig into all the ramifications. There are analysts that are a lot smarter and more knowledgeable about the interactions of world economies that have better insights as to which stocks/sectors will benefit. Fortunately, the graphics of candlesticks allow us to identify what 'their' thought process is. Candlestick charts demonstrate where buying and selling pressures are developing. Being able to analyze candlestick charts successfully allows for taking advantage of the smart money research.

Today's strength in the markets are the cumulative results of the investor sentiment that has processed the effects a Japanese recovery might have for US companies. The simple scanning techniques allow for visual identification of which sectors might perform the strongest. The Dow traded well up above the T-line a few days after a strong bullish Harami. The NASDAQ demonstrated a Kicker signal that gapped up through the T-line and continued to trade above that level. This is a significantly bullish chart pattern. It allows a candlestick investor to anticipate more upside trading.



Knowing what the probabilities are for the market direction, taking advantage of pattern moves becomes a higher priority. A breakout from a pattern is going to create much stronger gains than a mere uptrending stock price. The VVUS chart reveals a Fry pan bottom pattern in the process of breaking out. The probabilities of a breakout increase dramatically when there does not seem to be a great possibility of a major market pullback. The longer investor sentiment remains steady or positive, the more investor sentiment can start demonstrating some exuberance in pattern breakout situations.


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Good Investing,

The Candlestick Forum Team

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